Incident: The company released its 2024 semi-annual report. In the first half of the year, it achieved operating income of 2.748 billion yuan, an increase of 26.80%; net profit to mother of 0.738 billion yuan, an increase of 39.03% year on year; realized net profit deducted from non-mother of 0.7 billion yuan, an increase of 42.79% year on year.

The off-season was not easy; the growth rate for the second quarter was not 30% + deducted. In the second quarter of a single quarter, the company achieved revenue of 1.295 billion yuan, a year-on-year increase of 17.89%; realized net profit to mother of 0.385 billion yuan, an increase of 28.01% year on year; realized deducted non-net profit of 0.371 billion yuan, an increase of 33.61% year on year. Compared to the mid-term forecast previously issued by the company, the actual performance fell above the forecast center and slightly exceeded expectations. The second quarter was a low season for sales of the company's core product, the Ejiao series. With a high base for the same period last year, 24Q2 continued to grow rapidly, thanks to the simultaneous strength of new and old varieties under the new strategy. In the first half of the year, Ejiao and its products achieved revenue of 2.551 billion yuan, an increase of 32.52% over the previous year, contributing about 93% of revenue; the gross margin of Ejiao and its series products reached 75.36%, an increase of 2.48pp over the previous year. We expect this is due to changes in product scale effects and revenue structure changes.

Profitability is steadily improving, and operating efficiency is continuously optimized. 2024H1 achieved a gross profit margin of 73.5%, up 3.20pp from 2023H1; achieved a net profit margin of 26.9%, +2.34pp compared to 2023H1. The sales scale effect was compounded by internal cost control. 2024H1's sales/management/finance expense ratios were 36.4%/4.9%/-2.0%, respectively, +1.62 pp/ -3.80 pp/0.32pp, compared with the same period. We believe that as the reform of state-owned enterprises deepens, the company's internal operating efficiency is expected to further improve, leading to a continuous steady increase in profit margins.

The turnover situation is good, and channel inventory continues to be low. The company continues to vigorously promote channel governance and optimize the channel ecosystem. As of 2024, the company's inventory balance was 0.96 billion yuan, accounting for 7.7% of total assets (down 2.3 pp compared to 2023H1). The total amount of the company's accounts receivable and notes for the first half of the year was 0.43 billion yuan, which was roughly the same as at the end of 2023, accounting for 15.8% of revenue (down 11.6pp compared to 2023H1). Overall, the company's channel inventory remains at a healthy level.

Large dividends are given back to shareholders. The company also announced the 2024 mid-term profit distribution plan. Based on the total share capital on June 30, 2024, a cash dividend of 11.44 yuan (tax included) was distributed to all shareholders for every 10 shares. The total cash dividend was 0.737 billion yuan, accounting for 99.77% of net profit due to mother in the first half of the year.

Profit forecast and investment suggestions: We expect the company to achieve operating income of 5.776, 6.874, and 8.085 billion yuan in 2024-2026, an increase of 22.50%, 19.01%, and 17.61% year-on-year, and achieve net profit of 1.451, 1.746, and 2.098 billion yuan, up 26.10%, 20.32%, and 20.14% year-on-year. Considering that the company nourishes traditional Chinese medicine, sales of the core product Ejiao series are back on track, and are gradually forming dual-wheel drive growth for pharmaceuticals+health consumer goods, maintaining a “buy” rating.

Risk warning events: risk of fluctuations in raw material prices; risk of falling short of expectations for Ejiao block and compound Ejiao paste; risk of policy changes; risk of untimely update of research and usage information data.